The Income Statement - Where is my Money?
The income statement goes by several names and that would depend largely on your personal and educational background . Some people still refer to it as Profit and Loss statement. Anyways, the income statement looks at how much a company has earned over a specific period.
The typical income statements starts with revenue and then goes on to provide expenses broken down into groups and then finally arriving at a net income or net profit.
Before we move on, it is important to discuss the basis on which an income statement is prepared. It is called the accrual bases. This method of accounting, records revenue when service is delivered to the customer (I will find the time to discuss IFRS 15 in the coming weeks), and recognizes expenses when they are incurred even if there is no transfer of cash.
That being said, let's look at the various headers in an income statement.
1. Revenue: This is the amount earned from products sold or services rendered.
2. Cost of sales/Cost of goods sold: The difference between the two is that COS is used for a service business, while COGS is used for a product business and also they can be arrived at differently. These are simply amounts spent in order to earn revenue. For a product selling business, it is the cost price (and other costs) of items sold. For a service business like Medium and LinkedIn, it can be the cost of running the platform.
3. Gross Profit: This is what is left of revenue after COS or COGS has been deducted.
4. Operating Expenses: Just like most things on the income statement, this also goes by many names. I prefer to call it Operating Expenses. It is simply the expenses used to operate the business. Expenses like salaries, rent, professional fees etc.
5. Net Profit: This is what is left after the operating expenses had been deducted from the Gross Profit. This becomes the total earnings of the company from its operation over that period of time.
It is noteworthy that I mention a couple of things here; profit and earnings is not cash, that is, you can make a profit of $1 and not see that $1 in your bank account. Also, there are other specific elements in the Income Statement that can impact the overall net profit that were not mentioned in this article. Things like taxation, depreciation and amortization, interests as well as other comprehensive income and expenses. For the purpose of simplicity, let’s leave it at this and in subsequent pieces, we would rigorously engage these specific elements and link them back to this topic.
